Australian School Of Business

FINS1613: Business Finance

Semester 1 2013
Tutorial Quiz 4

Name:
Student number:

Tutorial: 960 (Extra)

Instructions:

1. You must complete a Generalised Answer Sheet for this exam.

(a) Complete the top portion of the sheet, providing your family name,
initials, and student number.
(b) If you are taking a quiz marked Extra, record the quiz number under
Other Data. If you are taking a quiz preprinted with your student
information, leave Other Data blank.
(c) Answer all questions using the generalised answer sheet. Clearly fill
in the response oval using a 2B pencil.

2. You must not retain any part of this examination document. All examina-
tion materials including this document must be submitted at the comple-
tion of the examination, otherwise your exam will not be marked.

3. All exams are unique and linked to your student number. Sign below to
confirm that your name and student number listed above are correct.

Signature:
Information:

1. Time allowed: 20 minutes

2. Grading:

(a) Total marks available: 100 marks

(b) This examination paper consists of 6 (six) multiple choice questions
worth 16 (sixteen) marks each.
(c) Correctly recording your student ID on the generalised answer sheet
is worth 4 (four) marks.
(d) All questions are graded on a correct/incorrect basis. There is no
penalty for answering a question incorrectly.

3. Unless otherwise specified, each question is independent of the others

and assumptions from one question do not carry over to the others.
4. Use of a calculator is allowed.
5. Some useful equations are printed below.

(a) Standard deviation:

v
u n
uX
u
u (ri − r̄)2
t i=1
σ(r) =
n−1

(b) Variance of a portfolio:

σ 2 = w12 σ12 + w22 σ22 + 2w1 w2 σ1 σ2 cov(R1 , R2 )
= w12 σ12 + w22 σ22 + 2w1 w2 σ1 σ2 ρ1,2

(c) Weighted average cost of capital:

E D
W ACC = ke × + kd (1 − t) ×
V V

GOOD LUCK!
Q UESTIONS 1 AND 2 (16 MARKS EACH )

1. Inflation, recession, and high interest rates are economic events that are
characterized as .

(a) unsystematic risk that can be diversified away

(b) market risk that can not be diversified away
(c) company-specific risk that can be diversified away
(d) systematic risk that can be diversified away
(e) none of the above

2. Stock X has a beta of 1.8 and Stock Y has a beta of 2.6. Which of the
following statements must be correct?

(a) If you invest $50,000 in Stock X and $50,000 in Stock Y, your portfolio
will have a beta less than 2.20, provided the returns on the two stocks
are not perfectly correlated.
(b) If the market risk premium decreases but the risk-free rate is un-
changed, Stock Y’s required return will decrease more than the re-
quired return of Stock X.
(c) Stock Y’s return this year will be lower than Stock X’s return.
(d) If expected inflation increases but the market risk premium is un-
changed, Stock Y will have a greater increase in required return than
Stock X.
(e) none of the above

1
 Q UESTIONS 3 AND 4 (16 MARKS EACH )

3. Leo is going to invest across two stocks and the risk-free asset as specified
below:

Asset Portfolio Weight Beta

Gatsby Inc. 41% 0.2
Titanic and Co. 59% 2.0

If the risk-free asset has an expected return of 7% and the market risk pre-
mium is 7%, what is the expected return of Leo’s portfolio?

(a) 11.57%
(b) 13.94%
(c) 10.13%
(d) 9.23%
(e) 15.83%

4. What is the historical standard deviation of annual returns for a stock with
the following returns?

Year Annual Return

2008 20.0%
2009 14.3%
2010 23.2%

Note: The average annual return of the above stock is 19.17%.

(a) 6.9%
(b) 3.8%
(c) 6.0%
(d) 4.5%
(e) 3.1%

2
 Q UESTIONS 5 (16 MARKS )

5. Stock A and Stock B each have an expected return of 22% percent, and
a standard deviation of 10% percent. The returns of the two stocks are
not perfectly correlated; the correlation coefficient is 0.5. You have put
together a portfolio that consists of 70% Stock A and 30% Stock B. What
are the expected return of the portfolio, E(rp ) , and the standard deviation
of the portfolio, σ(rp ) ?

(a) E(rp ) = 11.00%, σ(rp ) = 11.18%

(b) E(rp ) = 22.00%, σ(rp ) = 8.89%
(c) E(rp ) = 22.00%, σ(rp ) = 7.96%
(d) E(rp ) = 11.00%, σ(rp ) = 5.00%
(e) E(rp ) = 22.00%, σ(rp ) = 10.00%

3
 Q UESTIONS 6 (16 MARKS )

6. An analyst has collected the following information regarding Christopher

Co.:

• The company’s capital structure is 85% equity and 15% debt.

• The yield to maturity on the company’s bonds is 6%.
• The company’s year-end dividend is forecasted to be $1.53 a share.
• The company expects that its dividend will grow at a constant rate
of 14% a year.
• The company’s stock price is $22.
• The company’s tax rate is 31%.
• The company anticipates that it will need to raise new common stock
this year, and total flotation costs will equal 7% of the amount issued

Assume the company accounts for flotation costs by adjusting the cost of
capital. Given this information, what is the company’s WACC?

(a) 18.88%
(b) 17.70%
(c) 23.33%
(d) 21.56%
(e) 24.99%

4
 Australian School Of Business
FINS1613: Business Finance
Semester 1 2013
Tutorial Quiz 4

Name:
Student number:

Tutorial: 961 (Extra)

Instructions:

1. You must complete a Generalised Answer Sheet for this exam.

(a) Complete the top portion of the sheet, providing your family name,
initials, and student number.
(b) If you are taking a quiz marked Extra, record the quiz number under
Other Data. If you are taking a quiz preprinted with your student
information, leave Other Data blank.
(c) Answer all questions using the generalised answer sheet. Clearly fill
in the response oval using a 2B pencil.

2. You must not retain any part of this examination document. All examina-
tion materials including this document must be submitted at the comple-
tion of the examination, otherwise your exam will not be marked.

3. All exams are unique and linked to your student number. Sign below to
confirm that your name and student number listed above are correct.

Signature:
Information:

1. Time allowed: 20 minutes

2. Grading:

(a) Total marks available: 100 marks

(b) This examination paper consists of 6 (six) multiple choice questions
worth 16 (sixteen) marks each.
(c) Correctly recording your student ID on the generalised answer sheet
is worth 4 (four) marks.
(d) All questions are graded on a correct/incorrect basis. There is no
penalty for answering a question incorrectly.

3. Unless otherwise specified, each question is independent of the others

and assumptions from one question do not carry over to the others.
4. Use of a calculator is allowed.
5. Some useful equations are printed below.

(a) Standard deviation:

v
u n
uX
u
u (ri − r̄)2
t i=1
σ(r) =
n−1

(b) Variance of a portfolio:

σ 2 = w12 σ12 + w22 σ22 + 2w1 w2 σ1 σ2 cov(R1 , R2 )
= w12 σ12 + w22 σ22 + 2w1 w2 σ1 σ2 ρ1,2

(c) Weighted average cost of capital:

E D
W ACC = ke × + kd (1 − t) ×
V V

GOOD LUCK!
Q UESTIONS 1 AND 2 (16 MARKS EACH )

1. Inflation, recession, and high interest rates are economic events that are
characterized as .

(a) market risk that can not be diversified away

(b) systematic risk that can be diversified away
(c) company-specific risk that can be diversified away
(d) unsystematic risk that can be diversified away
(e) none of the above

2. Stock X has a beta of 0.2 and Stock Y has a beta of 2.4. Which of the
following statements must be correct?

(a) Stock Y’s return has a lower standard deviation than Stock X.
(b) If you invest $50,000 in Stock X and $50,000 in Stock Y, your portfolio
will have a beta less than 1.30, provided the returns on the two stocks
are not perfectly correlated.
(c) If the market risk premium decreases but the risk-free rate is un-
changed, Stock Y’s required return will decrease more than the re-
quired return of Stock X.
(d) Stock Y’s return this year will be lower than Stock X’s return.
(e) Stock Y’s return this year will be higher than Stock X’s return.

1
 Q UESTIONS 3 AND 4 (16 MARKS EACH )

3. Leo is going to invest across two stocks and the risk-free asset as specified
below:

Asset Portfolio Weight Beta

Gatsby Inc. 40% 1.3
Titanic and Co. 60% 0.4

If the risk-free asset has an expected return of 3% and the market risk pre-
mium is 12%, what is the expected return of Leo’s portfolio?

(a) 12.12%
(b) 7.56%
(c) 10.71%
(d) 9.19%
(e) 8.52%

4. What is the historical standard deviation of annual returns for a stock with
the following returns?

Year Annual Return

2008 –9.3%
2009 24.7%
2010 11.9%

Note: The average annual return of the above stock is 9.10%.

(a) 19.9%
(b) 22.6%
(c) 15.9%
(d) 17.2%
(e) 24.2%

2
 Q UESTIONS 5 (16 MARKS )

5. Stock A and Stock B each have an expected return of 19% percent, and
a standard deviation of 13% percent. The returns of the two stocks are
not perfectly correlated; the correlation coefficient is 0.2. You have put
together a portfolio that consists of 30% Stock A and 70% Stock B. What
are the expected return of the portfolio, E(rp ) , and the standard deviation
of the portfolio, σ(rp ) ?

(a) E(rp ) = 3.80%, σ(rp ) = 9.63%

(b) E(rp ) = 19.00%, σ(rp ) = 7.87%
(c) E(rp ) = 19.00%, σ(rp ) = 10.59%
(d) E(rp ) = 3.80%, σ(rp ) = 2.60%
(e) E(rp ) = 19.00%, σ(rp ) = 13.00%

3
 Q UESTIONS 6 (16 MARKS )

6. An analyst has collected the following information regarding Christopher

Co.:

• The company’s capital structure is 60% equity and 40% debt.

• The yield to maturity on the company’s bonds is 6%.
• The company’s year-end dividend is forecasted to be $1.41 a share.
• The company expects that its dividend will grow at a constant rate
of 13% a year.
• The company’s stock price is $23.
• The company’s tax rate is 32%.
• The company anticipates that it will need to raise new common stock
this year, and total flotation costs will equal 9% of the amount issued

Assume the company accounts for flotation costs by adjusting the cost of
capital. Given this information, what is the company’s WACC?

(a) 13.47%
(b) 12.25%
(c) 15.87%
(d) 10.04%
(e) 11.29%

4
 Australian School Of Business
FINS1613: Business Finance
Semester 1 2013
Tutorial Quiz 4

Name:
Student number:

Tutorial: 962 (Extra)

Instructions:

1. You must complete a Generalised Answer Sheet for this exam.

(a) Complete the top portion of the sheet, providing your family name,
initials, and student number.
(b) If you are taking a quiz marked Extra, record the quiz number under
Other Data. If you are taking a quiz preprinted with your student
information, leave Other Data blank.
(c) Answer all questions using the generalised answer sheet. Clearly fill
in the response oval using a 2B pencil.

2. You must not retain any part of this examination document. All examina-
tion materials including this document must be submitted at the comple-
tion of the examination, otherwise your exam will not be marked.

3. All exams are unique and linked to your student number. Sign below to
confirm that your name and student number listed above are correct.

Signature:
Information:

1. Time allowed: 20 minutes

2. Grading:

(a) Total marks available: 100 marks

(b) This examination paper consists of 6 (six) multiple choice questions
worth 16 (sixteen) marks each.
(c) Correctly recording your student ID on the generalised answer sheet
is worth 4 (four) marks.
(d) All questions are graded on a correct/incorrect basis. There is no
penalty for answering a question incorrectly.

3. Unless otherwise specified, each question is independent of the others

and assumptions from one question do not carry over to the others.
4. Use of a calculator is allowed.
5. Some useful equations are printed below.

(a) Standard deviation:

v
u n
uX
u
u (ri − r̄)2
t i=1
σ(r) =
n−1

(b) Variance of a portfolio:

σ 2 = w12 σ12 + w22 σ22 + 2w1 w2 σ1 σ2 cov(R1 , R2 )
= w12 σ12 + w22 σ22 + 2w1 w2 σ1 σ2 ρ1,2

(c) Weighted average cost of capital:

E D
W ACC = ke × + kd (1 − t) ×
V V

GOOD LUCK!
Q UESTIONS 1 AND 2 (16 MARKS EACH )

1. Inflation, recession, and high interest rates are economic events that are
characterized as .

(a) systematic risk that can be diversified away

(b) market risk that can not be diversified away
(c) company-specific risk that can be diversified away
(d) unsystematic risk that can be diversified away
(e) none of the above

2. Stock X has a beta of 2.4 and Stock Y has a beta of 1.7. Which of the
following statements must be correct?

(a) Stock X’s return this year will be lower than Stock Y’s return.
(b) Stock X’s return has a lower standard deviation than Stock Y.
(c) Stock X’s return has a higher standard deviation than Stock Y.
(d) If the market risk premium increases but the risk-free rate is un-
changed, Stock X will have a greater increase in required return than
Stock Y.
(e) If expected inflation increases but the market risk premium is un-
changed, Stock X will have a greater increase in required return than
Stock Y.

1
 Q UESTIONS 3 AND 4 (16 MARKS EACH )

3. Leo is going to invest across two stocks and the risk-free asset as specified
below:

Asset Portfolio Weight Beta

Gatsby Inc. 27% 1.6
Titanic and Co. 73% 1.0

If the risk-free asset has an expected return of 5% and the market risk pre-
mium is 7%, what is the expected return of Leo’s portfolio?

(a) 19.14%
(b) 10.72%
(c) 17.94%
(d) 13.13%
(e) 17.06%

4. What is the historical standard deviation of annual returns for a stock with
the following returns?

Year Annual Return

2008 21.5%
2009 –6.2%
2010 1.3%

Note: The average annual return of the above stock is 5.53%.

(a) 11.3%
(b) 17.0%
(c) 8.5%
(d) 14.3%
(e) 13.6%

2
 Q UESTIONS 5 (16 MARKS )

5. Stock A and Stock B each have an expected return of 16% percent, and
a standard deviation of 22% percent. The returns of the two stocks are
not perfectly correlated; the correlation coefficient is 0.2. You have put
together a portfolio that consists of 80% Stock A and 20% Stock B. What
are the expected return of the portfolio, E(rp ) , and the standard deviation
of the portfolio, σ(rp ) ?

(a) E(rp ) = 16.00%, σ(rp ) = 18.98%

(b) E(rp ) = 16.00%, σ(rp ) = 12.81%
(c) E(rp ) = 3.20%, σ(rp ) = 15.74%
(d) E(rp ) = 16.00%, σ(rp ) = 22.00%
(e) E(rp ) = 3.20%, σ(rp ) = 4.40%

3
 Q UESTIONS 6 (16 MARKS )

6. An analyst has collected the following information regarding Christopher

Co.:

• The company’s capital structure is 80% equity and 20% debt.

• The yield to maturity on the company’s bonds is 7%.
• The company’s year-end dividend is forecasted to be $1.30 a share.
• The company expects that its dividend will grow at a constant rate
of 11% a year.
• The company’s stock price is $31.
• The company’s tax rate is 32%.
• The company anticipates that it will need to raise new common stock
this year, and total flotation costs will equal 11% of the amount issued

Assume the company accounts for flotation costs by adjusting the cost of
capital. Given this information, what is the company’s WACC?

(a) 13.52%
(b) 12.32%
(c) 11.36%
(d) 10.16%
(e) 15.97%

4
 Australian School Of Business
FINS1613: Business Finance
Semester 1 2013
Tutorial Quiz 4

Name:
Student number:

Tutorial: 963 (Extra)

Instructions:

1. You must complete a Generalised Answer Sheet for this exam.

(a) Complete the top portion of the sheet, providing your family name,
initials, and student number.
(b) If you are taking a quiz marked Extra, record the quiz number under
Other Data. If you are taking a quiz preprinted with your student
information, leave Other Data blank.
(c) Answer all questions using the generalised answer sheet. Clearly fill
in the response oval using a 2B pencil.

2. You must not retain any part of this examination document. All examina-
tion materials including this document must be submitted at the comple-
tion of the examination, otherwise your exam will not be marked.

3. All exams are unique and linked to your student number. Sign below to
confirm that your name and student number listed above are correct.

Signature:
Information:

1. Time allowed: 20 minutes

2. Grading:

(a) Total marks available: 100 marks

(b) This examination paper consists of 6 (six) multiple choice questions
worth 16 (sixteen) marks each.
(c) Correctly recording your student ID on the generalised answer sheet
is worth 4 (four) marks.
(d) All questions are graded on a correct/incorrect basis. There is no
penalty for answering a question incorrectly.

3. Unless otherwise specified, each question is independent of the others

and assumptions from one question do not carry over to the others.
4. Use of a calculator is allowed.
5. Some useful equations are printed below.

(a) Standard deviation:

v
u n
uX
u
u (ri − r̄)2
t i=1
σ(r) =
n−1

(b) Variance of a portfolio:

σ 2 = w12 σ12 + w22 σ22 + 2w1 w2 σ1 σ2 cov(R1 , R2 )
= w12 σ12 + w22 σ22 + 2w1 w2 σ1 σ2 ρ1,2

(c) Weighted average cost of capital:

E D
W ACC = ke × + kd (1 − t) ×
V V

GOOD LUCK!
Q UESTIONS 1 AND 2 (16 MARKS EACH )

1. Inflation, recession, and high interest rates are economic events that are
characterized as .

(a) unsystematic risk that can be diversified away

(b) market risk that can not be diversified away
(c) company-specific risk that can be diversified away
(d) systematic risk that can be diversified away
(e) none of the above

2. Stock X has a beta of 2.7 and Stock Y has a beta of 2.2. Which of the
following statements must be correct?

(a) Stock X’s return has a higher standard deviation than Stock Y.
(b) If you invest $50,000 in Stock X and $50,000 in Stock Y, your portfolio
will have a beta less than 2.45, provided the returns on the two stocks
are not perfectly correlated.
(c) If expected inflation increases but the market risk premium is un-
changed, Stock X will have a greater increase in required return than
Stock Y.
(d) If the market risk premium increases but the risk-free rate is un-
changed, Stock X will have a greater increase in required return than
Stock Y.
(e) If expected inflation decreases but the market risk premium is un-
changed, Stock X’s required return will decrease more than the re-
quired return of Stock Y.

1
 Q UESTIONS 3 AND 4 (16 MARKS EACH )

3. Leo is going to invest across two stocks and the risk-free asset as specified
below:

Asset Portfolio Weight Beta

Gatsby Inc. 28% 1.4
Titanic and Co. 72% 0.2

If the risk-free asset has an expected return of 3% and the market risk pre-
mium is 14%, what is the expected return of Leo’s portfolio?

(a) 8.49%
(b) 14.88%
(c) 10.50%
(d) 7.26%
(e) 13.21%

4. What is the historical standard deviation of annual returns for a stock with
the following returns?

Year Annual Return

2008 –3.7%
2009 17.6%
2010 24.9%

Note: The average annual return of the above stock is 12.93%.

(a) 13.1%
(b) 14.9%
(c) 11.8%
(d) 10.8%
(e) 9.0%

2
 Q UESTIONS 5 (16 MARKS )

5. Stock A and Stock B each have an expected return of 15% percent, and
a standard deviation of 19% percent. The returns of the two stocks are
not perfectly correlated; the correlation coefficient is 0.5. You have put
together a portfolio that consists of 80% Stock A and 20% Stock B. What
are the expected return of the portfolio, E(rp ) , and the standard deviation
of the portfolio, σ(rp ) ?

(a) E(rp ) = 15.00%, σ(rp ) = 17.41%

(b) E(rp ) = 15.00%, σ(rp ) = 19.00%
(c) E(rp ) = 7.50%, σ(rp ) = 9.50%
(d) E(rp ) = 7.50%, σ(rp ) = 21.25%
(e) E(rp ) = 15.00%, σ(rp ) = 15.07%

3
 Q UESTIONS 6 (16 MARKS )

6. An analyst has collected the following information regarding Christopher

Co.:

• The company’s capital structure is 70% equity and 30% debt.

• The yield to maturity on the company’s bonds is 9%.
• The company’s year-end dividend is forecasted to be $0.85 a share.
• The company expects that its dividend will grow at a constant rate
of 10% a year.
• The company’s stock price is $21.
• The company’s tax rate is 34%.
• The company anticipates that it will need to raise new common stock
this year, and total flotation costs will equal 14% of the amount issued

Assume the company accounts for flotation costs by adjusting the cost of
capital. Given this information, what is the company’s WACC?

(a) 8.28%
(b) 10.57%
(c) 9.37%
(d) 12.08%
(e) 11.34%

4
 Australian School Of Business
FINS1613: Business Finance
Semester 1 2013
Tutorial Quiz 4

Name:
Student number:

Tutorial: 964 (Extra)

Instructions:

1. You must complete a Generalised Answer Sheet for this exam.

(a) Complete the top portion of the sheet, providing your family name,
initials, and student number.
(b) If you are taking a quiz marked Extra, record the quiz number under
Other Data. If you are taking a quiz preprinted with your student
information, leave Other Data blank.
(c) Answer all questions using the generalised answer sheet. Clearly fill
in the response oval using a 2B pencil.

2. You must not retain any part of this examination document. All examina-
tion materials including this document must be submitted at the comple-
tion of the examination, otherwise your exam will not be marked.

3. All exams are unique and linked to your student number. Sign below to
confirm that your name and student number listed above are correct.

Signature:
Information:

1. Time allowed: 20 minutes

2. Grading:

(a) Total marks available: 100 marks

(b) This examination paper consists of 6 (six) multiple choice questions
worth 16 (sixteen) marks each.
(c) Correctly recording your student ID on the generalised answer sheet
is worth 4 (four) marks.
(d) All questions are graded on a correct/incorrect basis. There is no
penalty for answering a question incorrectly.

3. Unless otherwise specified, each question is independent of the others

and assumptions from one question do not carry over to the others.
4. Use of a calculator is allowed.
5. Some useful equations are printed below.

(a) Standard deviation:

v
u n
uX
u
u (ri − r̄)2
t i=1
σ(r) =
n−1

(b) Variance of a portfolio:

σ 2 = w12 σ12 + w22 σ22 + 2w1 w2 σ1 σ2 cov(R1 , R2 )
= w12 σ12 + w22 σ22 + 2w1 w2 σ1 σ2 ρ1,2

(c) Weighted average cost of capital:

E D
W ACC = ke × + kd (1 − t) ×
V V

GOOD LUCK!
Q UESTIONS 1 AND 2 (16 MARKS EACH )

1. Inflation, recession, and high interest rates are economic events that are
characterized as .

(a) market risk that can not be diversified away

(b) systematic risk that can be diversified away
(c) unsystematic risk that can be diversified away
(d) company-specific risk that can be diversified away
(e) none of the above

2. Stock X has a beta of 1.2 and Stock Y has a beta of 2.9. Which of the
following statements must be correct?

(a) If you invest $50,000 in Stock X and $50,000 in Stock Y, your portfolio
will have a beta less than 2.05, provided the returns on the two stocks
are not perfectly correlated.
(b) Stock Y’s return has a higher standard deviation than Stock X.
(c) Stock Y’s return has a lower standard deviation than Stock X.
(d) If expected inflation increases but the market risk premium is un-
changed, Stock Y will have a greater increase in required return than
Stock X.
(e) If the market risk premium decreases but the risk-free rate is un-
changed, Stock Y’s required return will decrease more than the re-
quired return of Stock X.

1
 Q UESTIONS 3 AND 4 (16 MARKS EACH )

3. Leo is going to invest across two stocks and the risk-free asset as specified
below:

Asset Portfolio Weight Beta

Gatsby Inc. 42% 1.2
Titanic and Co. 58% 0.3

If the risk-free asset has an expected return of 2% and the market risk pre-
mium is 8%, what is the expected return of Leo’s portfolio?

(a) 5.36%
(b) 7.42%
(c) 4.94%
(d) 6.77%
(e) 5.85%

4. What is the historical standard deviation of annual returns for a stock with
the following returns?

Year Annual Return

2008 16.2%
2009 –0.8%
2010 –9.7%

Note: The average annual return of the above stock is 1.90%.

(a) 17.9%
(b) 13.2%
(c) 15.4%
(d) 14.1%
(e) 19.1%

2
 Q UESTIONS 5 (16 MARKS )

5. Stock A and Stock B each have an expected return of 20% percent, and
a standard deviation of 24% percent. The returns of the two stocks are
not perfectly correlated; the correlation coefficient is 0.8. You have put
together a portfolio that consists of 80% Stock A and 20% Stock B. What
are the expected return of the portfolio, E(rp ) , and the standard deviation
of the portfolio, σ(rp ) ?

(a) E(rp ) = 20.00%, σ(rp ) = 24.00%

(b) E(rp ) = 16.00%, σ(rp ) = 28.76%
(c) E(rp ) = 20.00%, σ(rp ) = 23.22%
(d) E(rp ) = 16.00%, σ(rp ) = 19.20%
(e) E(rp ) = 20.00%, σ(rp ) = 20.59%

3
 Q UESTIONS 6 (16 MARKS )

6. An analyst has collected the following information regarding Christopher

Co.:

• The company’s capital structure is 75% equity and 25% debt.

• The yield to maturity on the company’s bonds is 11%.
• The company’s year-end dividend is forecasted to be $1.54 a share.
• The company expects that its dividend will grow at a constant rate
of 9% a year.
• The company’s stock price is $22.
• The company’s tax rate is 40%.
• The company anticipates that it will need to raise new common stock
this year, and total flotation costs will equal 7% of the amount issued

Assume the company accounts for flotation costs by adjusting the cost of
capital. Given this information, what is the company’s WACC?

(a) 17.38%
(b) 12.75%
(c) 14.05%
(d) 16.66%
(e) 18.50%